TORONTO, Sept 7 (Reuters) - The Canadian dollar
strengthened on Wednesday after the Bank of Canada warned of a
worsening global economic picture but was not as dovish about
interest rates as traders had expected.

In a policy shift, Canada's central bank said there was
less need to raise interest rates because of slowing global
economic momentum, but policymakers also said Canadian growth
would resume in the second half of the year, with very
stimulative credit conditions a factor. [ID:nN1E786055]

The bank held its key interest rate steady at 1 percent, as
expected.

Analysts said that while the bank noted there is less need
to withdraw policy stimulus -- less need to raise rates -- than
seen in July, it also did not hint at any need for a rate cut.

"This might not have been quite as dovish overall, as some
may have been expecting, given the fact that the market was
actually priced for rate cuts at some point in the months
ahead," said Doug Porter, deputy chief economist at BMO Capital
Markets.

The Canadian dollar initially weakened in a knee-jerk
reaction to the central bank statement, but quickly recovered
strength as traders mulled the hawkish elements of the
statement.

"It still has these lingering elements of the hawkish.
Most, including ourselves, were looking for more of an overt
move to neutrality that would have in a sense sidelined any
talk of the need to withdraw monetary stimulus," said Stewart
Hall, currency strategist for RBC Capital Markets.

At 9:34 a.m. (1334 GMT), the Canadian currency CAD=D4
stood at C$0.9889 versus the U.S. dollar, or $1.0112, up from
Tuesday's North American session close at C$0.9898 to the U.S.
dollar, or $1.0103. It had touched a session low of C$0.9912 to
the U.S. dollar, or $1.0089, immediately after the rate
announcement.

The Canadian dollar is also expected to take direction from
global factors on Wednesday as the central bank statement is
digested.

World stocks rose from a two-week low and the euro rallied
across the board after Germany's top court rejected lawsuits
aimed at blocking Berlin's participation in bailout packages
for Greece and other euro zone countries. [MKTS/GLOB]

Higher energy prices, boosted by expectations of lower U.S.
crude stocks, also underpinned commodity-linked currencies such
as Canada's, as did better-than-expected Australian growth
numbers overnight. [O/R] [ID:nL3E7K70A2]

A Reuters survey of 43 forecasters had unanimously
predicted the Bank of Canada would keep its overnight target
rate at 1 percent. [CA/POLL]

Canadian bond prices retreated across the yield curve.

The two-year bond CA2YT=RR, which is especially sensitive
to Bank of Canada interest rate moves, was off 9.5 Canadian
cents to yield 0.907 percent. It yielded 0.88 percent before
the rate news.

The 10-year bond CA10YT=RR slipped 22 Canadian cents to
yield 2.265 percent, up from 2.248 percent before the
announcement.
(Editing by Jeffrey Hodgson)